Recently, the Victorian Supreme Court determined that a clause
in a labour hire contract providing for payment of an
"introduction fee" by an employer to a labour hire
company constituted an unreasonable restraint of trade.
The decision of the Court highlights the wide-ranging operation
of the restraint principles and illustrates that seemingly standard
contractual clauses may not be enforceable on the basis that they
effectively operate in restraint of trade.
The relevant facts of the case are set out below.
Earth Force Personnel Pty Ltd v EA Negri Pty
Ltd  VSC 426
Earth Force Personnel Pty Ltd (Earth Force), a
labour hire company, entered into a contract with EA Negri Pty Ltd
(Negri) for the supply of personnel to Negri.
A clause in the contract required Negri to pay a fee to Earth
Force if Earth Force introduced a worker from its labour pool to
Negri and Negri subsequently hired that worker.
Pursuant to the contract, Earth Force placed a casual worker
with Negri for a period of six weeks. Almost three months after the
worker finished the placement, Negri directly hired the worker on a
Earth Force issued an invoice to Negri for the introduction fee
in respect of the worker. Negri refused to pay the introduction
Earth Force commenced proceedings in the Magistrates' Court.
Negri successfully defended the proceedings and Earth Force
appealed the decision.
Decision of the Supreme Court
Justice Hargrave dismissed the appeal on the basis that the
clause in the contract requiring payment of the fee amounted to an
unenforceable restraint of trade.
The Court considered whether the clause operated in restraint of
trade, stating that the substance of the clause was important and
not its legal form. A clause would operate in restraint if it had
the effect of deterring a promisee from engaging in trade or
operated indirectly by way of an incentive or pressure to act in a
particular way or refrain from acting in a particular way.
The Court found that the introduction fee was sufficiently high
to deter Negri from directly employing a worker introduced to it by
Generally, clauses that operate in restraint of trade will be
unenforceable unless the party seeking the restraint can prove the
clause is reasonable. Having determined the clause operated in
restraint, the clause was then reviewed to determine whether the
restraint was reasonable.
The clause did not contain a time limitation on its scope. It
was therefore conceivable that the hiring by Negri of an employee
in 2018 could give rise to an introduction fee if that worker had
been placed by Earth Force with Negri in (say) 2010.
The clause also contained no limitation upon the capacity in
which the worker had to be hired. An introduction fee would be
payable if a worker placed with Negri subsequently upgraded his or
her skills and was employed by Negri directly in a new role
involving those upgraded skills.
The Court concluded that Earth Force was unable to prove the
operation of the clause was reasonable and therefore the clause was
Disputes regarding restraint of trade clauses more typically
relate to provisions in a standard employment contract between the
employer and employee. This case provides a timely reminder that
restraint of trade clauses need not be express or direct or
otherwise obvious and can arise in many situations.
The case also highlights the importance of drafting like
clauses. In the judgement, the Court accepted that introduction
fees are commonly charged by labour hire companies and are not
necessarily against public policy. Simply put, the clause in this
case was too broad. Had the clause contained some parameters or
limitations on its scope, the appeal may have been successful.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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